Two US-based Trac-x end-users, who spoke on condition of anonymity, told RiskNews that some firms were unhappy with the way JP Morgan and Morgan Stanley handled the Trac-x index’s reconstitution earlier this month. “There appeared to be a definite lack of communication for such a significant change in the underlying reference credits,” said one loan book manager at a North American bank. “We are not saying the process couldn’t have been handled better, but there was nothing malicious about it and we gained no competitive advantage,” JP Morgan’s Palmer claimed.
According to some traders, several firms have bristled at the level of disclosure required by the licensing agreements penned by Morgan Stanley and JP Morgan for Trac-x. Lisa Watkinson, Morgan Stanley’s global product manager for flow credit default swaps and credit indexation, said a few firms were “upset” by the way intellectual property rights were handled in licensing agreements. “We accepted their arguments, and dropped those elements from agreements back in September,” she added. Previously, licensees were required to obtain permission to structure non-standard derivatives based on Trac-x. RiskNews understands that Merrill Lynch, Goldman Sachs and Deutsche Bank were the most vocal in their dissent.
When the reconstitution of the index prior to its roll-out became a new flashpoint, Morgan Stanley appears to have been equally accommodating; it offered to make the reconstitution process more open and democratic, Watkinson told RiskNews.
However, by this time plans were already afoot among other dealers to create a rival product to Trac-x in the US. On October 16, a consortium of 11 credit derivatives dealers announced the launch of a 125-name tradable credit default swap index, dubbed ‘iBoxx CDX.NA.IG’.
The iBoxx product – jointly launched by ABN Amro, Barclays Capital, Bear Stearns, Citigroup, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, Lehman Brothers, Merrill Lynch and UBS – will begin trading next Monday, according to the consortium’s official statement. The 125 names in iBoxx CDX.NA.IG are equally weighted, and were determined using transparent rules designed to select a representative group of diversified US investment-grade borrowers, the consortium said. “We expect the combination of dealer support and investor acceptance will rapidly make iBoxx CDX.NA.IG the new standard for US investment-grade CDS index trading.”
Watkinson is baffled by the decision to create a rival product. "If the Trac-x product was lacking in some way and we were adverse to changing it, then maybe a new product would make sense," Watkinson said. "But unless you’re really adding value, launching a competing product just harms liquidity," she added. Meanwhile, JP Morgan’s Palmer told RiskNews he was “pleasantly surprised” that the new [iBoxx] product looked so similar to Trac-x, and that it would also be a surprise if it were to usurp Trac-x.
Some firms are hedging their bets though. The day after the official announcement of the new iBoxx product, three of the iBoxx consortium – Bear Stearns, Lehman Brothers and HSBC – signed licensing agreements to make markets in Trac-x.